Was a partnership's California yacht sale occasional when the partners called it personal but their books carried its expenses and depreciation?

Plain-English summary

A taxpayer obtained a seller's permit intending to manufacture fiberglass boats, but abandoned the venture without building any. It later leased the land and buildings and sold milling equipment acquired through a liquidation. On April 7, 1965, it also sold a California yacht that the partners claimed was personal property and did not report the sale.

The partnership books listed three boats, charged yacht operating, repair, and licensing expenses, and computed depreciation. Although those amounts apparently were not claimed on the federal return, the memorandum found the business books more compelling evidence that the yacht was a partnership business asset.

Staff counted three substantial business-property sales within a twelve-month period, but that count expressly assumed that a taxable sale reported in the fourth quarter of 1963 involved a business asset. Combining that assumed sale with two milling-equipment sales in June and July 1964 created a permit-requiring series in staff's view. The yacht's unusual character did not allow its later sale to be isolated as occasional.

Request, audit facts, assumptions, vessel warning, and source limits

An unidentified Headquarters Tax Counsel, shown as EHS:EDM, issued the internal memorandum on February 2, 1967. It answers the recipient's December 8, 1966 memorandum asking whether the California yacht sale was exempt under sections 6006.5(a) and 6367. Counsel says the facts came from that request and an audit report. Neither underlying document appears in the published two-page PDF.

The taxpayer had obtained a seller's permit to manufacture and sell fiberglass boats, but abandoned the plan after finding its proposed production method infeasible; it built no boats. It then rented or leased the land and buildings acquired for that venture. During the June 1, 1964 through April 30, 1965 audit period, it made two reported sales of milling equipment acquired through a redacted liquidation. It had also reported a taxable sale in the fourth quarter of 1963, which counsel assumed involved equipment held or used in the business. The source does not identify that property or establish the assumption.

The partnership books listed three boats: two based in Portland, Oregon, and the yacht in California. The memorandum specifically says an Oregon-based yacht was carried as marine inventory and sold in Oregon on August 21, 1964 for $15,384.62. It does not explain why that transaction was not one of the three substantial sales used in the later series analysis. The California yacht was sold on April 7, 1965 and was not reported.

The partnership charged the boats' operating, repair, and licensing expenses to its books and computed depreciation on the California yacht. Those expenses and depreciation apparently were not claimed on the partnership's federal income-tax return, a fact counsel acknowledged supported the partners' personal-property position. Counsel nevertheless found the partnership's business-asset book treatment more compelling and treated the California yacht as part of the partnership's selling activity.

Sections 6367 and 6006.5(a) framed the occasional-sale exemption, while section 6019 treated more than two retail sales in twelve months as retailer activity. Counsel combined the assumed fourth-quarter 1963 business-asset sale with the June and July 1964 equipment sales and found a series sufficient in number, scope, and character to require a seller's permit. The memorandum says a varied seller could not isolate one disposition merely because it had different characteristics. It also invokes an unnamed earlier matter in which a major oil and gas company was treated as the retailer of a yacht despite the sale's unusual and nonrecurring character.

The memorandum therefore concludes that the California yacht sale was one of the permit-requiring series and was not an exempt occasional sale under the historical analysis. It does not supply the December request, audit report, permit application, production-plan records, liquidation documents, land or building leases, invoices, quarterly return, identity or details of the 1963 sale, yacht titles or partnership ledger, expense and depreciation entries, federal return, proof of use or ownership, audit schedules, assessment, taxpayer response, cited unnamed yacht ruling, administrative recommendation, appeal, or final Board action.

The live annotation preserves the abandoned boat venture, land and building rental, June and July 1964 equipment sales, fourth-quarter 1963 assumed business-asset sale, three boats, Oregon and California yacht dispositions, expense and depreciation treatment, federal-return difference, three-sale series, and non-occasional conclusion. It says the taxpayer listed three yachts “as marine inventory,” while the supporting memorandum says three boats were listed and expressly applies marine-inventory treatment only to an Oregon-based yacht. The annotation omits the December request and audit report; audit period; liquidation; reporting status; express assumption and missing identity for the 1963 sale; the $15,384.62 Oregon amount; the unnamed oil-and-gas-company ruling; missing records; and final-outcome gap. Most importantly for present use, the live page adds: “Subsequent statutory change re sales of vessels.” It does not identify the change.

What this means for you

Partnerships owning vessels

Under this historical memorandum, book treatment, paid expenses, and depreciation outweighed the partners' contrary personal-property position. The live annotation's statutory-change note makes the result unsafe to apply to a current vessel sale without checking current law.

Accountants and tax professionals

Reconcile partnership ledgers, income-tax returns, licensing, operating expenses, depreciation, other asset sales, and actual use before classifying a vessel disposition. Verify every sale used in the series rather than relying on an unidentified-property assumption.

Common questions

Q: Did the taxpayer ever manufacture boats?
A: No. The planned fiberglass-boat venture was abandoned before any boats were built.

Q: Why was the yacht treated as a business asset?
A: It was carried on partnership books with expenses and computed depreciation.

Q: Did omission from the federal return prove personal ownership?
A: No. The memorandum gave greater weight to the partnership's own books.

Q: Why was the yacht sale not isolated as occasional?
A: Staff combined an assumed 1963 business-asset sale with two 1964 milling-equipment sales and treated that group as a sufficient series.

Q: Was every sale in that series established by the published record?

A: No. Counsel expressly assumed that the fourth-quarter 1963 sale involved a business asset, and the supporting records are absent.

Q: Did the Oregon yacht sale count in the three-sale series?

A: The memorandum describes the August 1964 Oregon sale but does not include it in the three transactions used for the series analysis or explain why.

Q: Does the live annotation say the law later changed?

A: Yes. It adds a note of subsequent statutory change concerning vessel sales but does not identify the amendment.

Q: Does the source show the final Board result?

A: No. It provides Tax Counsel's internal conclusion, not a final order or other final action.

Citations and references

• California Revenue and Taxation Code §§ 6006.5(a), 6019, and 6367
• December 8, 1966 internal request and audit report — identified but not included
• Unnamed prior ruling involving a major oil and gas company's yacht sale — described but not identified or included
• Permit, liquidation, land and building, sales, vessel, book, return, audit, response, and final-outcome records — described or implicated but not included

Verbatim support

From the official February 2, 1967 Tax Counsel memorandum:

Inasmuch as we have assumed that the 1963 sale which occurred in the last quarter of that year was of a business asset, we believe that when this sale is combined with the two equipment sales in 1964 (June and July), there has been a series of sales sufficient in number, scope and character to constitute an activity requiring the holding of a seller's permit.

The fact that the taxpayer carried the yacht on its partnership books as a business asset (i.e., expenses of yacht paid by partnership and depreciation computed) appears to be more compelling in determining its true nature and character than the taxpayer's statement that the yacht was personal property belonging to the individual partners in their private capacity because neither the expenses nor the depreciation were claimed for federal income tax.

From the live annotation:

(Note.—Subsequent statutory change re sales of vessels.)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.0677
• Original supporting opinion: 395.0677 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

To:

From:

395.0677

Date:

February 2, 1967

Tax Counsel (EHS:EDM) - Headquarters

Subject:

This is in reply to your memorandum of December 8, 1966, in which you ask our opinion on whether the sale of a yacht in this state by the above named taxpayer is an exempt occasional sale under §§ 6006.5(a) and 6367 of the California Sales and Use Tax Law. After reviewing your memorandum and the audit report on this account, the facts appear to be as follows: We understand that taxpayer's original intent in applying for a seller's permit was to engage in the manufacture and sale of fiber glass boats. After discovering that their intended method of production was not feasible, they abandoned this venture. No boats were ever built. The taxpayer then rented or· leased the land and buildings it had acquired for the original venture. The taxpayer acquired the milling equipment which was the subject of two of its sales during the audit period (6/1/64 to 4/30/65) through a liquidation of the --- Both of these sales were reported to the state. There was also a sale reported as taxable in the fourth quarter of 1963. We assume that the subject of this sale was also equipment held or used in taxpayer's business activity. The sale of the subject yacht occurred on April 7, 1965. The taxpayer did not report this sale. Taxpayer listed three boats on its (partnership) books. Two were based in Portland, Oregon, and the above mentioned one in California. The Oregon based yacht was carried on the partnership books as marine inventory. It was sold in Oregon on August 21, 1964, for
$15,384.62. All expenses incidental to operation, repair, and licensing of taxpayer's boats were charged to the partnership books. Depreciation was computed on the yacht and shown on the books. However, it appears that neither the expenses nor the depreciation was claimed on the partnership's federal income tax return. The last mentioned sentence would appear to support taxpayer's contention that the subject yacht was the personal property of the partners and was, therefore, not being held by the partnership as a business asset.

Section 6367 of the Sales and Use Tax Law exempts from tax the receipts from "occasional sales." Section 6006.5(a) defines "occasional sale" as including a sale of property not held or used in the course of an activity requiring the holding of a seller's permit, provided the sale is not one of a series sufficient in number, scope and character to constitute an activity requiring the holding of a seller's permit. In interpreting the latter phrase, we have considered the fact that the making of more than two retail sales of tangible personal property in any 12-month period constitutes the seller a retailer under § 6019 of the Sales and Use Tax Law. We have also ruled that a sale is not one of a series of sales if the property sold was used exclusively in a private or personal capacity (i.e., family automobile). Applying this test to the facts presented for our opinion, it would appear that the taxpayer has made three substantial sales of tangible personal property within a 12-month period. Inasmuch as we have assumed that the 1963 sale which occurred in the last quarter of that year was of a business asset, we believe that when this sale is combined with the two equipment sales in 1964 (June and July), there has been a series of sales sufficient in number, scope and character to constitute an activity requiring the holding of a seller's permit. We have consistently taken the position that where a person or firm continually makes a variety of sales there is no basis to single out one specific sale merely because it has ";certain characteristics that the other sales do not have. While we fully realize that the sale of the yacht may be an unusual type of sale in light of taxpayer's prior sales (i.e., milling equipment), it is our opinion that it cannot be isolated from the other various sales made by taxpayer and treated as an exempt occasional sale. In a similar matter, we ruled that a major oil and gas company was a retailer of a yacht it sold even though the sale was an unusual and nonrecurring type of sale in comparison to other types of sales made by the company. The fact that the taxpayer carried the yacht on its partnership books as a business asset (i.e., expenses of yacht paid by partnership and depreciation computed) appears to be more compelling in determining its true nature and character than the taxpayer's statement that the yacht was personal property belonging to the individual partners in their private capacity because neither the expenses nor the depreciation were claimed for federal income tax. From this we must conclude that the sale of the yacht was one of a series of sales sufficient in number, scope and character to constitute an activity requiring the holding of a seller's permit.

EDM:lt